Fitch Downgrades Changchun Urban Development to 'BBB' on Municipality Review
The notes were issued by Chang Development International Limited, a wholly owned subsidiary of CCDG. CCDG has provided a guarantee to the notes. The assignment of the final ratings follows the receipt of documents conforming to information already received. The bonds are rated at the same level as CCDG's IDR, as the guarantee structure transfers the ultimate responsibility of payment to CCDG.
KEY RATING DRIVERS
Strong Links with Changchun: CCDG's ratings are credit-linked with that of China's north-eastern city of Changchun. This is reflected in the company's full municipality ownership, strong municipal oversight of its financials and operations, integration with the municipality's general account and strategic importance of CCDG's operation with that of Changchun. These factors suggest a strong likelihood of CCDG receiving extraordinary support from the municipality, if needed.
Changchun's Weaker Fiscal Performance: Changchun's economy has been affected by the rebalancing of the national economy and experienced a downturn in 2015. The city's fiscal performance weakened following the economic downturn, especially the manufacturing industry. However, in 2016 the city's fiscal performance stabilised and it expects to receive substantial national level support under the National Development Reform Commission's northeast provinces revitalisation programme for 2016-2018. Also fiscal transfers from upper-level government have mitigated the negative effect from the economic slowdown and moderately high tax-supported municipal debts.
Strategic Importance Remains Strong: CCDG is Changchun Municipality's largest integrated platform and strategic arm. The municipality uses the company to develop key infrastructure projects, ranging from primary land-development to building affordable public housing and providing water supply and sewage treatment. CCDG has an important role in implementing the city's development blueprint, which is drawn up by the municipality.
Strong Municipal Integration: The Changchun Municipality has merged its major urban development companies and water-supply company into CCDG since its establishment in 2013. The municipality is also committed to providing CCDG with CNY9bn per year through the official purchase of - or subsidies for - CCDG's underground pipeline services and around CNY120m in annual water supply subsidies. Fitch believes CCDG's debt will be ultimately serviced by the municipal government via subsidies and capital injections.
Tight Control and Supervision: CCDG's board members are appointed by Changchun and the company's major projects need municipal approval. CCDG says the municipality closely monitors its financing plan and indebtedness and it is required to regularly report operational and financial results.
Modest Credit Profile: CCDG's financial profile has been characterised by large capex, negative FCF and high leverage over the previous three years. Fitch believes this trend will continue in the medium-term, driven by ongoing infrastructure development in Changchun. Fitch expects CCDG to continue receiving subsidies or capital injections from the municipality.
An upgrade of Fitch's internal assessment of Changchun and a stronger or more explicit commitment of support from the municipality may trigger positive rating action on CCDG.
A significant weakening of CCDG's strategic importance to the municipality, dilution of Changchun's shareholding or reduced municipality support may result in a downgrade. A downgrade may also stem from the municipality's weaker fiscal performance or increased indebtedness that leads to deterioration in its creditworthiness.